Investors Shouldn’t Run Out of Carlyle’s Stock, Analyst Says

One of the hedge funds firms controlled by Carlyle Group LP is running into trouble, but one analyst says now is actually the time to buy Carlyle’s stock.

On Tuesday, after the company disclosed that investors are preparing to pull roughly half the assets in Claren Road Asset Management LLC, Carlyle’s stock dropped as much as 6.6% before bouncing back. Shares ended the day down 2.3% to $23.07. At its intraday lows of $22.06, Carlyle’s stock came perilously close to its 2012 IPO price of $22 per share.

“The hedge funds are just a nominal contributor to [Carlyle's] earnings,” he wrote.

Private-equity investments are a much more significant driver of Carlyle’s results, he wrote, and the private-equity portion of the company is doing pretty well.

“It has already banked 58% of the cash earnings that we projected for the full year at the start of the year, and the outlook is good that it will continue to generate strong cash earnings both for the next several quarters and the next several years,” Mr. Kotowski wrote.

As of Tuesday’s close, Carlyle’s stock is down 16% so far this year, which Mr. Kotowski says make it the “most unloved stock” in an “unloved group,” which he describes as asset managers mostly focused on private equity. The group was down 8% for the year as of Monday’s close.

Investors have been selling Carlyle’s stock amid fears not just around the performance of certain hedge funds controlled by Carlyle, but also over its potential exposure to the energy industry. There are fears that Carlyle’s investments in the energy sector prior to the sharp drop in the price of oil could hurt the firm’s profitability. Yet Mr. Kotowski says he expects energy to serve as more of a positive than a negative for Carlyle, because it has significant dry powder to invest in the sector going forward. And its existing investments in energy are not that significant to Carlyle’s overall picture

All of these investor fears obscure the larger earnings picture from private equity, he says, which is a strong one.